After reading the Federal Trade Communication’s (FTC) recently released “Feeding America in a Time of Crisis – The United States Grocery Supply Chain and the COVID-19 Pandemic,” one might get the distinct impression that some of America’s largest retailers including Amazon, Kroger and Walmart were the primary cause for the price increases and supply chain disruptions that occurred during the pandemic that began in early 2020 and continue to some extent today. The report also cited large wholesalers such as Associated Wholesale Grocers, C&S Wholesale Grocers and the McLane Co. as contributing to consumer price hikes and supply chain issues.
“As the pandemic illustrated, a major shock to the supply chain can have cascading effects on consumers, including the prices they pay for groceries. The FTC’s report examining U.S. grocery supply chains finds that dominant firms used this moment to come out ahead at the expense of their competitors and the communities they serve,” said FTC chairwoman Lina Khan.
The large federal agency began its investigation in November 2021 to analyze why prices were rapidly inflating and supply chain breakdowns were increasing. Twenty-eight months later that 20-page report (with another 28 pages of appendices) concluded:
- Some large purchasers pressed their suppliers for favorable allocations of products in short supply. At the outset of the pandemic, many companies suspended policies that would penalize suppliers for not filling orders of items that were in shortage. However, when suppliers could not fulfill every order, simply having product in stock became a point of competitive differentiation for wholesalers and retailers. To gain access to scarce products and therefore a competitive advantage, some companies—most often larger ones—used policies that imposed strict delivery requirements on their upstream suppliers and threatened fines for noncompliance. Walmart even tightened the delivery requirements its suppliers had to meet to avoid fines as the pandemic went on. In some cases, suppliers preferentially allocated product to the purchasers threatening to fine them, which may have affected competition between the companies that threatened these fines and those that did not. The potential for powerful retailers to distort product allocations during a shortage suggests that crises may create an opportunity for some firms to entrench their market power.
- Companies came to recognize that excessively consolidated supply chains were a liability. The pandemic revealed that concentration can undermine market resiliency and create market fragility. The stark impact of the supply chain disruptions during the pandemic prompted some firms to recognize the risks associated with having few suppliers available. Where a firm has many viable suppliers, the failure of any single supplier is less likely to disrupt operations. As a result, during the pandemic some retailers sought to diversify their supplier base, particularly of private-label (or store-branded) goods. Some larger firms purchasing in markets with few producers began exploring whether to build or acquire manufacturing capacity to reduce their exposure to concentrated markets. These efforts, however, have the potential to leave the remaining buyers even worse off if those large customers buy one of the few remaining producers rather than building that capability from scratch. Without policy intervention, markets that are fragile because of concentration may only further consolidate.
- When trade promotions designed to increase demand for products dried up, some firms were harmed more than others. Supply chain disruptions also changed dynamics in trade promotions, which for purposes of this study we define as any payment by a supplier for preferential access to downstream customers through the commitment of retail shelf space, product placement, or advertising. Trade promotions represent a significant revenue stream for many wholesalers and retailers. The reduction or withdrawal of these payments during the pandemic had a greater impact on retailers that were more dependent on promotional funds and made it harder for them to compete with rivals that used different pricing strategies. The significant size of trade promotions suggests further study of their economic impact may be warranted in light of their potential competitive impacts.
- Grocery retailer profits rose and remain elevated, warranting further consideration by the commission and policymakers. This study did not test whether the specific companies that received 6(b) Orders increased their prices by more or less than their input cost increases. However, publicly available data on general grocery retail patterns reveal that during the pandemic, one measure of annual profits for food and beverage retailers—the amount of money companies make over and above their total costs—rose substantially and remain quite elevated. Specifically, food and beverage retailer revenues increased to more than 6 percent over total costs in 2021, higher than their most recent peak, in 2015, of 5.6 percent. In the first three-quarters of 2023, retailer profits rose even more, with revenue reaching 7 percent over total costs. This casts doubt on assertions that rising prices at the grocery store are simply moving in lockstep with retailers’ own rising costs. These elevated profit levels warrant further inquiry by the commission and policymakers. The pandemic made clear that supply chain bottlenecks, which can be created or exacerbated by limited competition, can leave markets exposed to major supply chain shocks—and that those shocks, in turn, can allow major firms to entrench their dominance and further harm competition. Achieving more diversified supply chains, including through promoting competition, can both limit the severity of supply chain shocks and, in turn, reduce the opportunity for that entrenchment.
While the FTC report also puts partial blame on the role manufacturers played because of supply chain disruptions and subsequent price hikes, the country’s largest retailers bore most of the criticism in the FTC staff report (during its original investigating, the agency also reviewed documents and responses from three leading CPG companies – Procter & Gamble, Kraft Heinz and Tyson Foods).
The report also noted disruptions with labor supply, transportation/trucking, and with the availability of inputs and raw materials.
The report concluded by noting:
“The COVID-19 pandemic placed tremendous pressure on the supply chains that produce and move the nation’s food from farm to table. When unexpectedly put under sustained stress, there were not enough extra hands ready to pick up the work of sick colleagues, not enough spare trucks and truck drivers ready to haul more loads, and no easy way to suddenly ramp up production to meet surging demand. Bottlenecks were suddenly exposed as firms up and down the supply chain struggled to maintain their output and feed our nation. Some firms seem to have used rising costs as an opportunity to further hike prices to increase their profits, and profits remain elevated even as supply chain pressures have eased. Larger retailers and wholesalers with considerable leverage over their suppliers were able to take more aggressive action to protect themselves than were their smaller rivals. After widespread suspension of OTIF (On Time In Full) policies early in the pandemic, some large firms reimposed OTIF fines and penalties while the pandemic continued, pressing their suppliers to fill their orders or face large fines. In turn, smaller retailers and wholesalers without stringent OTIF policies were placed at a competitive disadvantage during the pandemic, when they received proportionally less product than their rivals. The sudden inability to obtain needed goods did sensitize industry participants across the supply chain to the dangers of excessive dependence on a small number of viable suppliers for critical inputs. As supply chains were disrupted, we observed firms across the supply chain beginning to examine alternatives to their existing suppliers with a new and more critical eye. Where concentration was highest, we observed retailers looking to protect themselves from markets that were excessively concentrated by considering vertically integrating to better control their supply of products. Shortages likewise prompted producers to reduce their funding of trade promotions. Promotions designed to increase sales made little sense when those producers were unable to meet existing demand. These changes affected retailers differently depending on their pricing model. Most notably, these trade promotions reflect a significant amount of money within the industry, and so the competitive impact of these differential effects (or of the promotions generally), may warrant further study. The supply chain disruptions during the pandemic provided insight into the competitive dynamics of the grocery industry. Limited competition can lead to bottlenecks that increase the impact of supply chain shocks on different businesses and consumers while simultaneously creating opportunities for further entrenchment. The potential for powerful retailers to distort product allocations during a shortage suggests that crises may create an opportunity for some firms to entrench market power. Similarly, retailers saw that they needed to increase the resilience of their supply chains when they faced markets with few producers, recognizing the value that markets with many producers bring to securing supply. As supply chains normalize, some of these symptoms may subside, but the underlying issues remain.”
One grocery industry trade association, NGA (National Grocers Association), applauded the FTC study. “This study confirms what independent grocers and their customers experience firsthand: dominant national chains or so-called “power buyers” are abusing their immense economic power to the detriment of competition and American consumers. In communities nationwide, independent grocers strive to compete on price, quality, service, convenience, and product range. However, decades of lax antitrust enforcement enable grocery power buyers to coercively squeeze suppliers to comply with their trade demands, unfairly disadvantaging smaller competitors.” NGA president and CEO Greg Ferrara added, “The result – confirmed by the FTC’s study – is a less efficient consumer supply chain where buyer power dictates priority distribution of high-demand products and special pricing arrangements.”
The NGA has long argued on behalf of its independent retail members that the nation’s biggest chains are getting bigger and more powerful because they are using their size to pressure suppliers, and taking advantage of arbitrary market segment loopholes to negotiate special pricing and package sizing of consumer goods that are denied to smaller competitors.
“COVID-era disruptions and food price inflation have made the grocery supply chain literally a kitchen table issue for millions of Americans,” said Chris Jones, NGA chief government relations officer and counsel. “This report highlights the urgent need for the Federal Trade Commission and Department of Justice to enforce existing laws like the Robinson-Patman Act, and for Congress to pass new laws that would level the playing field for grocery competitors for the benefit of the American consumer.”
However, one executive for a large corporate chain (and one that the FTC singled out for criticism) largely disagreed with some of the findings and context of the report.
“After reading the report, I won’t argue that some of the FTC’s conclusions are correct – especially in the areas of supply chain, labor disruptions and major transportation challenges,” he noted. “However, to blame America’s largest retailers for bearing the greatest responsibilities for price increases and other breakdowns wreaks of inaccuracy and prejudice. As for the NGA press release, I found it curious that they didn’t mention the role of AWG, C&S and McLane in supposedly creating price increases. Don’t AWG and C&S supply many of the independents who were supposedly adversely impacted by the alleged actions of their wholesalers? And yet they were allegedly complicit in hurting those same members? If you believe the report, you can’t have it both ways. I also found it hypocritical that the FTC would single out the overall dominance of Amazon and Walmart for their power and influence over pricing and supply chain leverage, but refuse to acknowledge that those retailers – and other non-traditional retail food sellers – should be considered when measuring the entire competitive landscape in evaluating market share in the Kroger-Albertsons recently rejected merger.”